U.S. units of foreign lenders including Deutsche Bank AG may berequired by regulators to comply with tougher capital rules thatsome banks sought to skirt, three people with knowledge of thediscussions said.

The Federal Reserve, drafting standards for the nation's largestbanks, may force non-U.S. firms to house all of their businesseswithin a U.S. holding company, said the people, who requestedanonymity because the rules haven't been completed. That meanslocal units would have to meet minimum capital standards regardlessof their parents' resources.

Deutsche Bank and London-based Barclays Plc have changed theirU.S. legal status in the past two years to discard theholding-company structure. The treatment could force foreign banksto inject capital into their U.S. units and limit their ability tomove funds across borders, said Luigi De Ghenghi, a partner at lawfirm Davis Polk & Wardwell LLP in New York.

“Fragmenting capital along regional lines will impose real costson doing cross-border banking,” said De Ghenghi, a member of thefirm's financial-institutions group. “Global banks will risk endingup with overcapitalized units all around the world becauseregulators are reluctant to allow the repatriation of capital onceit's moved to their jurisdiction.”

Foreign lenders can choose whether to create U.S. bank holdingcompanies. Those units were exempt from capital standards as longas their parent firms were well-capitalized.

The Fed provided $538 billion of emergency loans to the U.S.units of European banks during the financial crisis, almost as muchas it did to U.S. firms. That increased political pressure onlawmakers and regulators to tighten rules for all.

The 2010 Dodd-Frank Act closed the capital exemption for foreignbank holding companies. Some non-U.S. lenders then altered theirlegal structures to remain outside the scope of local capitalrules.

Deutsche Bank, Germany's biggest lender, estimated in 2010 thatit might need to inject almost $20 billion into its U.S. unit tocomply with the same rules as domestic banks, the Wall StreetJournal reported last year, citing an internal company document.The division, known as Taunus Corp., dropped its status as a bankholding company in February.

Barclays, the U.K.'s second-biggest bank, said in February 2011that it deregistered Barclays Group U.S. as a bank holding company,partly to sidestep the capital requirements.

Leverage Requirements

UBS AG and Credit Suisse Group AG, Switzerland's largestlenders, were among firms that didn't have holding companies tostart with. Most of the largest foreign institutions have smallcommercial-banking units in the U.S., where their operations arelargely centered on securities trading.

Spokesmen for the Fed, Frankfurt-based Deutsche Bank, Barclaysand UBS and Credit Suisse, both based in Zurich, declined tocomment on the potential rule change.

Daniel Tarullo, a Fed governor who chairs the committee on banksupervision, is scheduled to speak about the regulation of foreignbanking organizations today at Yale University in New Haven,Connecticut.

Forcing foreign lenders to put U.S. assets under bank holdingcompanies would subject them to U.S.-specific leveragerequirements, in addition to global capital rules agreed to by theBasel Committee on Banking Supervision.

Basel regulations dictate how much capital banks need based onthe riskiness of their assets. Lenders headquartered in the U.S.are subject to an additional leverage cap based on total assets,rather than on those weighted by risk. Leverage is a measure of abank's debt in relation to shareholder equity.

While it would be easier for U.S. trading units of foreign banksto comply with the risk-based standard, the simple leverage limitcould force them to raise more capital, according to one of thepeople.

The Institute of International Bankers, a New York-basedlobbying group that represents 100 foreign lenders operating in theU.S., has warned regulators against blanket rules that would treatall firms the same, according to Chief Executive Officer Sarah“Sally” Miller.

“Based on the risk Bank X poses to the U.S. financial system,then they could ask that one for more capital, as Dodd-Frankstipulates,” Miller said. “But across-the-board, one-size-fits-allrules like this can be very harmful, discouraging foreign banks tobe here. That could hurt lending, considering that 25 percent ofall commercial and industrial bank loans in the U.S. are made byforeign firms.”

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